It is becoming increasingly common for parties to incorporate break clauses into their leases. As most landlords and tenants are aware, great care needs to be taken when exercising a break clause to ensure that it is not frustrated.
What about the position where a break notice has been served but one or both of the parties wish to withdraw the notice? Whilst this situation may seem straightforward there are some fundamental and surprising issues to consider.
The fact is that, once a break notice has been served, it cannot be unilaterally withdrawn.
Even if both want the notice to be withdrawn, they can only achieve this by recognising that the notice will terminate the existing lease on the break date and entering into a new lease.
Whilst the documentation of this might be quite simple, the creation of a new tenancy may give rise to some unexpected and important consequences such as:
- will any guarantor or other security under the previous lease be released?
- will the new lease give the tenant security under the Landlord and Tenant Act 1954?
- was the previous lease an “old” lease (ie pre 1 January 1996) where previous tenants were responsible throughout the term and will an Authorised Guarantee Agreement now be necessary?
- HMRC guidance provides that if a break notice is withdrawn before it takes effect, the lease will be treated as continuing for SDLT purposes. The position could be different if the rent is increasing.
- are there any underleases, and how would these be treated?
- do any rent deposits need to be returned?
Whilst withdrawal can in effect be achieved, by the grant of a new lease, one needs to tread carefully, and consider the implications.